Self-storage industry keeps on keeping

For an industry that emerged from nowhere with no inherent allure, no collective marketing savvy, and no tangible product to take home, the rental self-storage industry has piled up impressive numbers.

Fifty-thousand storage facilities now dot the American landscape, most of them austere, nearly windowless buildings wedged into commercial strips and industrial zones. That means the industry boasts more domestic locations than McDonald's, Subway and Jack in the Box combined.

With each storage yard containing, on average, 500 rental compartments, there are literally millions of garage-like vaults in which to store golf clubs, skis and old clothing, says R. Christian Sonne, a self-storage specialist at Cushman & Wakefield Western, an Irvine financial services firm. The combined square footage of those units is three times the size of Manhattan, by one calculation. Every man, woman and child in the United States could stand inside those spaces all at once, industry officials like to say.

And still do jumping jacks.

“It's way bigger than people think,” Rachel Greenfield, marketing manager for a storage-related company, says of the industry, which barely existed in the 1960s and began a span of steady growth in the 1970s. A tipping point occurred near the end of the century, when the concept more than took off, she says. “It blew up.”

A fragmented market

By then, Wall Street had discovered the sector. Infusions of cash created what one expert calls a “super-fragmented” playing field in which tens of thousands of relatively minor storage operators, including more than 27,000 stand-alone “mom and pops,” compete against a handful of goliaths that control hundreds of locations apiece.

Most new construction ended during the recession, and many operators suffered, but overall the industry held up well compared with the retail and office sectors, Sonne says. Occupancy rates and income are rising again. The industry takes in $22 billion annually, twice what Americans spent last year buying movie tickets.

Such success makes self-storage one of the remarkable stories of American commerce. Even those in the industry are amazed, especially since the first storage yards were almost afterthoughts, an attempt to squeeze a few dollars from land next to freeways or on the outskirts of town. Or land awaiting later development into hospitals or retail centers.

Storage has always battled a perception problem: that it is illogical to pay to keep something you already own, and perhaps even pay more in rent than the merchandise is worth.

The reasons for stashing it

What no one fully appreciated was how useful temporary storage would become in a highly transient society.

“This is an event-driven business,” says Lance Watkins, founder and CEO of Storage Outlet, a chain with 15 locations, including sites in Fullerton, Huntington Beach and Westminster. Those important events often involve what he calls the “three Ds”: divorce, debt problems and death.

People move. They upsize, they downsize, they combine households. They clean out the homes and apartments of deceased loved ones. They expand a business and need a place for extra inventory. “You come home and a water pipe broke and your house is flooded,” Watkins says. “You need a storage unit to put your stuff in.”

And America, it turns out, is a demonstrably materialistic society. People cling to photo albums and school yearbooks. They hang onto objects they might have difficulty replacing, or things that “might be valuable someday,” whether or not they still fit into closets and garages.

Southern California, a dense and transient megalopolis, grew as a self-storage hotbed. Orange County is home to four of the industry's top 20 storage firms, in addition to the California Self Storage Association, the industry trade group, which is based in Irvine.

Low cost, low maintenance

Watkins, 48, a Newport Beach resident, entered the industry in the mid-1990s. In those days, especially, the overhead was low. He placed some of his facilities on land that nobody else could use, negotiating long-term leases on power-company easements. He took advantage of the U.S. trade imbalance with China by having his storage units built overseas at minimal cost. The units were used as one-time, one-way shipping containers, bringing Chinese-made goods into America.

Once the containers arrived, he says, they were modified and installed at his yards as storage units.

Today's yards, including Watkins' 900-unit facility in Fullerton, are far more modern, but they remain relatively inexpensive to build and operate compared with office buildings and apartment houses. If a storage tenant moves, cleanup is instantaneous. There's virtually no need to paint walls or modernize. A new study by Cushman & Wakefield compared returns on investment in storage with those in other real-estate sectors: Over 15 years, storage returns topped 16 percent, compared with over 13 percent for apartments, according to Sonne, the storage specialist.

“Nobody was as high as self-storage,” he says.

Despite the favorable fundamentals, many insiders believe the industry is entering a painful period of consolidation and upheaval, much like what the airline and hospitality industries have gone through. In part, it's because of the sheer financial might of big firms such as Glendale-based Public Storage, the industry leader, which operates more than 2,000 facilities nationwide.

As part of a real-estate investment trust, Public Storage has access to capital at rates far lower than smaller operators can get, industry experts say. Four of the nation's top five firms, representing some 3,800 storage yards, are held by similar trusts strongly positioned to gobble up smaller competitors.

So far, due to the overall strength of the industry, relatively few smaller firms have put themselves on the sales block, but financial pressures are escalating as the heretofore low-tech industry adapts to the Internet age, industry experts say.

Watkins says self-storage has lagged far behind other types of business in how it promotes its product. Until recently, most operators relied heavily on street visibility and Yellow Pages ads.

“The only decision you made in marketing was, ‘Am I in this phone book or that phone book?'” Watkins says. “‘Do I put a guy out there with … an arrow sign?' That was it. That's how sophisticated our industry was.”

Internet marketing

Now, though, “We've really become marketing companies,” he says, because so many people look for storage units and promotional deals on the Web, typically via Google searches. Mom-and-pop companies do not always turn up on the critical first page of those search results, even when they are located near the customer. Instead, the customer sees big firms like Public Storage, which has offered a tough-to-beat $1 move-in special, and storage-booking websites comparable to the travel industry's Expedia and Travelocity.

So-called “aggregators” – Sparefoot.com, Storagefront.com, Selfstorage.comand USstoragesearch.com – are a new element in the industry. They offer the consumer a smorgasbord of storage options, charging the storage yards a one-time finder's fee, typically $75, any time someone books a rental unit. Storage yards must agree to the finder's fee to be listed on the sites' directories.

Watkins, a critic, says these new players are, in effect, middlemen wringing profits from storage just as other aggregators collect revenues from travel. The lost income creates pressure on smaller operators and may drive the industry's consolidation.

“Today 30 percent of the revenue for every hotel room you book ends up in the pockets of these online reservation systems,” he says. “And if the hotel industry or the airline industry or the rental car industry could undo all that, they would do it in a second.”

Venture capitalists

SpareFoot, one popular storage aggregator, is not a product of the industry, but instead grew out of the tech culture and its prodigious venture-capital system. The founders were two former UCLA students – one of whom, Chuck Gordon, was an artist studying sculpture, while the other, Mario Feghali, was a psychobiology major who intended to become a brain surgeon.

With hopes of someday selling his art, Gordon signed up for a senior-year entrepreneurial course in Singapore, and he needed a place to store his things, says Greenfield, the marketing manager for SpareFoot and also its spokeswoman. Daunted by rental-storage costs, Gordon arranged to stash his belongings with friends and later conceived a business idea: a “peer-to-peer” network of people willing to store for others for a fee. The plan was an alternative to traditional storage, Greenfield says.

Gordon and Feghali launched the startup in 2008 and eventually got funding from Capital Factory, an Austin, Texas-based incubator, which tossed out the peer-to-peer approach and overhauled the business plan into what SpareFoot is today. So far, the company has raised $4.5 million and lists more than 6,500 storage facilities on its site, Greenfield says. “We get millions of storage customers visiting,” she says.

Some argue that directories such as SpareFoot give an Internet presence to companies that otherwise would have little hope of showing up high on a Google search.

Optivest Properties, the Dana Point company, is larger than most, but far from the scale of the industry giants.

“We are a Sparefoot user,” says Allan, the company president. The site substantially boosted rentals at a 100,000-square-foot storage facility near Fort Hood in Killeen, Texas.

Optivest now does zero advertising in the Yellow Pages, Allan says. The company is further adapting to changes in the industry by embracing consolidation: It is finalizing the creation of a real-estate investment trust meant to compete with the large existing trusts, Allan says. Four companies are combining assets; Optivest's 42 storage facilities will become part of a new entity with nearly 400 storage yards.

“Our structure will give us cheaper access to capital,” he says.

The good news for self-storage entrepreneurs is that the business continues to catch on. In the mid-1990s, only one home out of 17 rented a storage unit, according to the nonprofit Self Storage Association., a trade group based in Alexandria, Va. Today the number is one out of 10.

‘Let's keep it' mindset

Sonne, the Cushman & Wakefield specialist, says attitudes have shifted; more consumers are willing to accept the monthly cost as a part of their lifestyle. His own unit, near his home in Villa Park, contains surfboards and ski equipment and his collection of old rock albums – The Who, Dan Fogelberg, Led Zeppelin.

“I've been hauling those around since the late '70s,” he says, admitting, “It's silly, isn't it? When you can download now?”

Europeans certainly don't get it, at least not yet. Packing extra stuff into windowless warrens is mainly an American quirk. Roxanne Varzi, a UC Irvine anthropology professor who recently spent a sabbatical in Vienna, sees far less need to own and keep in other cultures.

Americans, she says, seem gripped by “a constant, low-level anxiety about not having enough. There's a fear … ‘I've got to hang onto this couch. What if I can't afford this couch 10 years down the line?'”

The 50,000 storage facilities in the United States compare with fewer than 10,000 in the rest of the world, according to the Self Storage Association. But Sonne, who tracks the industry, says the picture is changing; storage continues its inexorable spread.

“There's significant development,” he says. “In Europe, it depends on the country. Asia, Australia, Hong Kong. Ten years ago, in Hong Kong, people had no idea what it was.” Now it's taking root, Sonne says.